Finding two silver linings
for the year

There are two basic strategies followed by most investors, Mark Yusko believes. One is used to get rich, the other to stay rich. As chief investment officer for the University's endowment, Yusko leaves no doubt which strategy he follows.

"We're in the stay-rich business because we have been made rich by our benefactors," Yusko said.

Both points were underscored dramatically over the past year, first by the development office's record in raising money -- and second by the UNC Management Company's record in preserving it.

Consider: For the fiscal year 2002, which ended in June, the University received $180 million in gifts and private grants. Meanwhile, as the stock market dropped 17.5 percent for the year, the endowment actually managed to gain a fraction of a point.

Yusko has overseen the fund nearly five years now. In all those years the fund posted far higher returns than in 2002, yet it is the 2002 fund performance of which Yusko is most proud.

That's because the primary job of an endowment fund is to preserve capital. The second job is to grow it. "If the market is sinking, the best you can do is keep your head above water and avoid drowning."

The value of the endowment fund stood at $1.11 billion when the 2002 fiscal year started on July 1, 2001. The fund had increased 0.03 percent when the fiscal year ended on June 30. The endowment's return ranked it in the top 5 percent among other university endowments for the fiscal year.

Safekeeping a balance by rebalancing investments
Yusko said the success of the fund stems from the solid and disciplined investment policy put in place by a strong board of professionals and followed by a dedicated management staff.

That discipline kicked into high gear at the start of 2000 in response to the performance of the fund over the fourth quarter of 1999.
The fund had gone up 18 percent.

When the board met in February, its members viewed the fourth-quarter results not as a welcome sign but a danger signal.
All were glad for the gain, of course, but fearful that such gains disappear as quickly as they come.

Huge gains in certain asset classes, particularly technology, had left the portfolio badly out of balance -- thus overly exposed to future losses.

The investment policy already in place forced the board to "rebalance" the portfolio before the market collapsed. It did so by selling off some high-flying stocks and replacing them with stocks and other investments that had long been in the bargain-basement section of the market.

"The stock market is the only place I know, when things go on sale, people run out of the store," Yusko said. "When nobody wants something, that's when there is value."

At the same time, Yusko said, you have to be diligent in researching the company to make sure you understand all the internal and external forces that have contributed to the company's declining value.
"The key to the discipline of rebalancing is to sell into euphoria and buy into panic," Yusko said. "When everybody else wants to buy you should be selling, and when everybody is selling you should want to buy."
And so they did.

The portfolio, for instance, had begun trimming down its holdings in technology before the so-called "bubble" burst in spring of 2000. For fiscal year 2002, technology stocks fell 35 percent.

"Starting in February of 2000 and then in May of 2000, we started making decisions based on our conclusion that the world didn't look right in terms of valuation," Yusko said.

"We didn't make those decisions because we were smarter than other investors. We made those decisions because we knew our portfolio was out of whack and it didn't feel right. We started selling large cap growth stocks and technology stocks because they had gone up too much and gotten outside of our strategic targets."

And they started investing in the kind of stocks that had performed badly the previous year, including small cap stocks and conservative value stocks.

In the process, the fund began moving away from what Yusko called "equity management" and more to "skill-based management." This approach encompasses everything from private investing to venture capital, from real estate to hedge funds. This approach focuses not only on managers who are good at picking stocks but managers who are good at building companies, Yusko said.

Over the past year, the portfolio was in such a defensive posture that, "had the market continued to scream upward, we would have looked pretty silly," Yusko said.

In fact, the one quarter the market performed the best -- the fourth quarter immediately following Sept. 11 -- the endowment dramatically under-performed.

Three out of four. That's a batting average Yusko is happy to take.
"We don't mind having an occasional home run but we are not swinging for them," Yusko said. "We get lots of base hits and occasionally make a mistake and get a home run."

And when you don't swing for home runs, you don't strike out as much.

Swinging for the fences
The development office, on the other hand, aims to hit home runs every year, and its time at the plate in 2002 proved to be no exception.

Despite the failing economy and falling stock market, the generosity of donors did not waver. The result was another banner year for contributions.

In fact, the $180 million raised in fiscal 2001 marked a 12 percent increase from the $160 million brought in the previous year. It also brings to six the number of consecutive years the University has surpassed $100 million in private giving.

Bequests and life income gifts posted the largest gain, generating $10.9 million compared to $3.4 million the previous year -- a 221 percent increase.

Stock gifts multiplied by 25 percent from $12.7 million in 2001 to $15.9 million in 2002. Gifts from corporations grew by 30 percent, and donations from alumni rose by 10 percent from $29 million in 2001 to $32 million in 2002.

Participation by Chancellor's Club members, the senior class, parents and via the Internet also increased significantly.

"We're excited about the opportunities our donors have created," said Associate Vice Chancellor of University Development Margie Crowell. "Faculty, students, research, public service, facilities -- all will benefit."
Gifts received during the fiscal year include a challenge gift from the W.R. Kenan Jr. Charitable Trust that has the potential to create the largest endowed professorships in University history. Ten $3 million eminent professorships will be named if the challenge is met by other Carolina donors. Generous support for professorships also came from alumnus Alston Gardner, who boosted international studies with a $10 million leadership gift encompassing a professorship, study abroad program and speaker series.

William Ferris, former chair of the National Endowment for the Humanities and a widely recognized leader in Southern studies, joined the University faculty thanks in part to a commitment of funds from an anonymous donor. Faculty member David McNelis and his wife, Gladys Hau McNelis, pledged $2.5 million to establish a professorship in the Carolina Environmental Program, and the Z. Smith Reynolds Foundation gave $1 million to establish the Thomas Willis Lambeth Distinguished Chair in Public Policy. Physical therapy received its largest gift ever with a bequest from the estate of L'Vir Sande that established 10 scholarships -- a first for the program.

Generous gifts from foundations and individuals enhanced programs and curricula. The Freeman Foundation contributed $2 million in support of the Asian studies program. A grant of $3.96 million from the Lilly Foundation supported the first major national baseline study of the religious practices of American youth. The Blue Cross Blue Shield Foundation donated $1 million to the School of Public Health to support scientific, educational and practice-based initiatives. The National Endowment for the Humanities issued a $500,000 challenge grant to the College of Arts and Sciences in support of the Ancient World Mapping Center. Gifts from the Spray Foundation of Atlanta and the Randleigh Foundation Trust of Chapel Hill enabled Carolina to out-recruit several other top universities, including Yale, for three outstanding young teachers and scholars.

On to Oct. 11
Gifts received during the year will count toward the University's Carolina First campaign, a multi-year initiative with the goal of making Carolina the nation's leading public university. Carolina First kicks off Oct. 11 with an announcement of the campaign goal and funds raised to date.
Chancellor James Moeser, during his State of the University Address on Sept. 4, spoke of the vital connection between fundraising and the University's overall goal of furthering excellence.

"Indeed, our biggest challenge today is not to become so totally absorbed in our immediate problems that we lose sight of our long-term vision," Moeser said. "This requires a kind of bifocal view of reality -- a commitment to both responsible management and visionary leadership. Our vision is simple but profound -- to be the leading public university in America.

"Our Board of Trustees has embraced this vision. The steering committee of the Carolina First Campaign has been so inspired and uplifted by this vision that they have helped us generate over $846 million in new commitments to Carolina, 89 newly endowed faculty chairs toward our goal of 200, more than 160 undergraduate scholarship funds and nearly 90 graduate fellowship funds.

"This Oct. 11, a year later than originally planned, we shall finally make the public announcement of the campaign's goals. It is amazing to me, that in one of our economy's darkest periods, we have seen this incredible outpouring of support for Carolina."

For more information on the campaign, see carolinafirst.unc.edu.